To settle a $770 invoice, Anna can pay $760 now or the full amount 45 days later.

a. Which alternative should she choose if money can earn 9 3/4%

multiple choice

a - Pay $760 now

b - Pay full amount 45 days later

b. What rate would money have to earn for Anna to be indifferent between the alternatives? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places.) Rate ______ %

Invoice Value = $770

Value if Paid today = $760

Value if Paid after 45 Days = $770

No. of Credit Days = 45

No. of Days in a Year = 365

Rate of Interest = 9.75%

Effective Cost of Trade Credit = (Invoice Value / Value if paid today)^{(No. of Days in a Year / No. of Credit Days)} - 1

Effective Cost of Trade Credit = (770 / 760)^{(365 / 45)} - 1

Effective Cost of Trade Credit = 11.19%

Thus, effective return if the discount option is chosen by us is 11.19%.

a)

Since, the effective return of discount option > return on investment

i.e. 11.19% > 9.75%,

we should choose the discount option as we would get more return over there.

Thus, we should pay now. Thus, option (a) i.e. Pay $760 now.

b)

Money should earn a rate of return of 11.19%, to be indifferent between the 2 options.